HONG KONG – Many people seem convinced that the productivity gains from AI will solve the problem of unsustainable budget deficits in advanced economies. By showering governments with higher tax revenues, the thinking goes, AI will leave even the most profligate countries with shrinking deficits.
That could be right. But there are many more reasons to think that such expectations are dangerously optimistic. For starters, AI seems likely to increase the share of capital in output while reducing the share of labor, which tends to reduce the tax intake. Absent a determined effort to increase taxes on capital income — which is becoming ever more difficult as wealth becomes more concentrated, politically powerful and mobile — it is unlikely that tax revenue will grow as quickly as output.
Moreover, even if revenues do grow, what assurance is there that the political system won’t respond by just ramping up spending and deficits even more? After all, the advanced economies are already very rich.
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